The UK inflation rate is rising at its fastest rate in 40 years. This is predominantly a result of soaring fuel and energy prices, as well as recent pressure on food costs.
Year-on-year inflation for the month of May was officially recorded at 9.1%, a dramatic increase in the average price level which will put huge financial pressure on UK consumers.
Inflation, which measures the change in average price levels throughout the economy, is usually a result of either too much demand, or increasing costs for firms. The UK economy, and others around the world, are currently facing extreme difficulties in global logistics and sourcing crucial resources such as grain, oil, and natural gas.
One reason for this supply-side pressure is the ongoing impact of Covid-19, but the most disruptive factor in recent months is the war in Ukraine. Sanctions on the Russian economy and disruption to supply-chain networks through Ukraine have led to huge increases in the cost of many commodities. This drives up the price of raw materials for producers who are then forced to pass on their increased costs to consumers in the form of higher prices. Hence, what we call cost-push inflation!
In a bid to stem the spiraling rate of inflation, the Bank of England has responded with an increase in the interest rate from 1% to 1.25%. It is hoped that this will dampen demand-side pressure on prices, but given the extreme reasons for the current economic climate: a global pandemic and military invasion; it is hard to see how ordinary economic tools are going to be of much use.
THINK LIKE AN ECONOMIST!
Q1. Define inflation.
Q2. Identify the two types of inflation which are mentioned in the article.
Q3. Explain why increasing costs of raw materials would lead to inflation.
Q4. Define interest rate.
Q5. Explain why government’s increase interest rates when inflation is increasing.
Q6. Analyse the impact of high inflation rates on consumers in the UK.
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